US Commodity Futures Trading Commission (CFTC) followed regulators around the world in issuing a stern warning regarding the potential pitfalls of cryptocurrency speculation.
The regulator urges investors to be wary of participating in the latest digital cryptocurrency schemes, and that they should not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes.
In doing so, the CFTC follows other international actors in issuing warnings to speculative investors. The United Arab Emirates’ financial regulator, the Securities and Commodities Authority, urged caution regarding ICOs not long ago, and the International Organization of Securities Commission released a notice alerting investors to the risks associated with ICOs.
China’s central bank was the first in the world to entirely ban ICOs, a seemingly radical solution to solve the shortcomings of token sales. Even South Korea – a market which was initially quick to embrace cryptocurrencies – followed suit in implementing an ICO ban, leaving many to wonder how the regulatory frameworks in western countries might be shaped.
These bans are the result of practically uncontrollable structural security failings in the crypto community. As hackers and scammers are attracted to the amount and velocity of transaction in the crypto sphere, a large percentage of funds raised in ICOs never reach the ICO arrangers. In banning ICOs altogether, China and South Korea seek to eliminate this uncertainty.
ICOs security inadequate
In a recent publication by EY (formerly Ernst & Young), these dangers of poor security infrastructure were highlighted, as it can lead to a loss of funds and personal data. When personal data is hacked, it often ends up making its way to the black market, where it can be used for identity theft or fraud.
The US Commodity Futures Trading Commission recently joined other regulatory bodies in highlighting the possibility of “pump-and-dump” schemes in the cryptocurrency market. However, this came just a day after CFTC Commissioner Brian Quintenz and CFTC Chairman Christopher Giancarlo publicly implored crypto-companies to take the matter of regulation into their own hands.
In a testimony to the Senate Agricultural Committee, Giancarlo stated that crypto companies should scramble to sanitize the crypto sector. ”They need to know they’ve got a responsibility in cleaning up this industry if they really wanted to be something that bears the respect and becomes part of not only our future but their future as well”, he said in from of the Senate committee.
ICOs are not only under fire from governments and NGOs; they are also facing adversity from social media behemoth Facebook. Last month, Facebook decided that it would no longer be showing ads for cryptocurrencies or ICOs. In a statement, Facebook Product Management Director Rob Leathern explained that the move is the result of an “intentionally broad” policy against fraudulent marketing.
Whilst Google has not yet implemented any comparable bans on cryptocurrency ads, many are calling for them to take a similar stance. It would certainly not be unprecedented – Google has previously banned high-rate payday loan advertisements. However as of yet, not formal decision regarding cryptocurrency ads has been announced.
This range of different attitudes regarding how cryptocurrencies should be regulated has created a lot of uncertainty moving forward. Without any clear international strategy for whether cryptocurrencies should be encouraged, discouraged or even banned, stakeholders are in a state of limbo as they await a comprehensive regulatory framework.
In contrast, other countries are embracing the shift towards virtual currencies. The municipality of Zug in Switzerland is a gleaming example of this. Known as the Crypto Valley, Zug has become a crypto hotbed during the last years.
Unlike the bans in China and South Korea, Switzerland has pushed for more lenient cryptocurrency regulations, spearheading domestic regulation for four different types of ICOs. This comes as Swiss economics minister Johann Schneider-Ammann recently stated that he wanted Switzerland “to be the crypto nation”.
Notwithstanding the uncertainty regarding how crypto regulation should look, there is an even bigger hurdle that the blockchain process needs to clear before reaching mainstream adoption. This is that of security.
The size of the cryptocurrency sphere has attracted the attention of hackers and scammers alike. The absence of a centralized authority, information chaos, and the blockchain’s irreversibility hold notable allure for hackers, and as a result, on average more than ten percent of ICO funds are lost.
A recent phishing scam that is symptomatic of the hit the decentralized home-sharing network Bee Token. Hackers posing as ICO operators managed to swindle potential investors of nearly $1 million dollars, in just 25 hours.
This is partly as a result of that blockchain project founders often focus on attracting investors leading up to the ICO, rather than prioritizing in building a secure platform infrastructure. The most common form of ICO theft is through phishing, since a phishing website clone can be virtually impossible to distinguish from the original.
Cryptocurrency startup LoopX recently performed an “exit scam”. After raising $4.5 million in a series of ICOs, the company went dark – deleting all of their social media accounts, and taking their website offline.
A similar story is that of Prodeum. This company promised to “revolutionize the fruit and vegetable industry”, before wiping their entire website – leaving only written profanity behind on a white background.
ICOs regulation exigency
This makes it clear that the blockchain has some major bumps in the road to pass, before reading the mainstream adoption highway. However, any solution would have to be a multifaceted one. Whilst blockchain technology seems to urgently need more regulation, many fear that overly tight regulations might end up stifling the budding industry as a whole.
As cryptocurrencies might very well symbolize the next step in digital payments, this is something that policymakers want to avoid. Even if global regulations were implemented in a satisfactory and consistent manner, there is still the question of security.
With large amounts of money ”leaking” from ICOs due to chronic issues with hacking, this might dissuade large actors from conducting ICOs. For example, Telegram is reportedly about to launch an ICO with so-called GRAM tokens.
Such a crowdsale could, according to some, raise as much as $2.55 billion. The risk that around 10% of this could go missing due to hacking is simply unacceptable for Telegram.
Phishing attacks are hard to defend against, and calling on developers to improve the security in their new-born ICO blockchain platforms is simply too costly to be an effective solution.
The blockchain represents a fascinating segment of new technologies – albeit one that needs scrutiny both regarding regulation and security.
